Educational Articles

Value Line’s Precious Metals objective group consists of funds with the stated policy of investing at least 50% of their assets in gold and/or precious metals stocks or bullion. In reality, most funds in this group place well over 50% of their assets in these groups. That said, there tend to be two types of funds here, those that invest almost exclusively in gold and those that invest more broadly in precious metals (though, in reality, even these funds will have material exposure to gold and gold stocks). There is also a small collection of funds that offer “inverse” performance to the price of gold.

In general, the Precious Metals objective group is fairly small, and most of the funds have very similar goals and performance. The exception, of course, is the “inverse” style of fund. The similarity in the funds and performance is driven by two factors. First, there simply aren’t all that many ways to invest in gold and precious metals—the list of stocks is about as short as the list of funds. Second, gold and precious metals are commodities, and their price swings can be extreme.

That said, precious metals, particularly gold, are often considered a “store of value” in times of inflation and, for the more extreme times, in case society falls into chaos. Thus, some recommend a small gold component for all portfolios. Small, however, is a key word, as most asset allocation models, including Value Line’s, don’t recommend more than a few percentage points of exposure to this category. It is also important to note that gold and precious metals stocks and funds are very different from owning gold or precious metals directly in the form of bullion. Indeed, if society did happen to fall into chaos, owning shares in a gold fund isn’t going to help anyone buy a loaf of bread.

At the end of the day, gold and precious metals funds can fill an important niche. But it is a niche and a volatile one at that. Investors should be cautious about how much exposure they maintain here.

Over the long term, the Precious Metals objective group has been a very strong performer relative to the broader market, as measured by the S&P 500 Index. For the 10-year period ended July 29, 2011, the group had an annualized gain of 22.9%, while the S&P 500 Index reported an annualized gain of 2.6%. For five years and three years, the group had returns of 13.2% and 12.2%, respectively, while the Index reported gains of 2.3% and 2.8%. Over the trailing 12 months ended in July, the Precious Metals objective group reported a return of 25.3%, compared to 19.7% for the S&P 500 Index. The group has an average Risk Rank of 5, indicating a very high level of risk. This reflects the dramatic up-and-down moves that the group has experienced over the past 10 years.

One fund with a relatively good year-to-date (YTD) as of July 29, 2011, is the Tocqueville Gold Fund (TGLDX). This fund’s investment objective is to seek long-term capital appreciation.

To achieve this goal, the fund invests at least 80% of its net assets (plus borrowings for investment purposes) in gold bullion and securities of global mining and gold processing companies. No more than 20% of the fund’s assets may be invested directly in gold bullion and other precious metals.

The fund’s strategy is value-oriented and contrarian. It seeks out businesses that have fallen out of favor with most investors and are believed to be selling at attractive prices. The fund may also identify companies with strong long-term business fundamentals and then wait for prices to fall in order to buy them at a discount to intrinsic value. The fund will sell stocks when they are no longer considered to be good values, or when more attractive opportunities present themselves.

At least 80% of its assets are normally invested in the stocks of foreign and U.S. companies principally engaged in the exploration, mining, development, fabrication, processing, marketing, or distribution of metals or minerals. The majority of these companies will be principally engaged in activities related to gold, silver, platinum, diamonds, or other precious and rare metals or minerals. Up to 100% of the fund’s assets may be invested in foreign securities and up to 20% directly in gold, silver, or other precious metal bullion and coins.

The fund focuses on selecting junior and intermediate exploration companies from around the world. It will also use futures and options to enhance its return and/or reduce risk.

A third fund with a relatively good year-to-date return through July 29, 2011 is Wells Fargo Advantage Precious Metals Fund A (EKWAX). The fund seeks long-term capital appreciation.To achieve its objective, the fund invests at least 80% of its total assets in investments related to precious metals. Companies in this space are engaged in, or receive at least 50% of their revenues from the exploration, development, mining, processing, or dealing in gold or other precious metals and minerals, including silver, platinum, and/or diamonds. It may invest up to 100% of assets in equity securities of foreign issuers, including ADRs, and up to 25% in debt securities, including preferred shares, linked to precious metals. Investments are made across all market capitalizations.

Management takes a disciplined approach to risk management through top-down macroeconomic analysis and bottom-up stock selection. Among the macroeconomic influences considered include geopolitical risks, the strength of the U.S. dollar, jewelry demand, inflation expectations, and the seasonality of gold and precious metals demand. The fund also looks for high-quality companies that are positioned to improve their relative value over time.

Management may reduce a position if the stock reaches a predetermined valuation target, the underlying fundamentals of the company are deteriorating, or a more attractive investment opportunity is identified.

In the table below, we have listed 10 top-performing funds through July 29, 2011 that we follow in our Fund Advisor database.